Examining the changes of conservatism in financial reporting with emphasis on the time-series changes of accruals and MTB

Subject Areas : International Journal of Finance, Accounting and Economics Studies

Received: 2011-03-05 Accepted : 2011-04-23 Published : 2011-09-20

Keywords: operational accruals, Conservatism, MTB, non-operational accruals,

Abstract :

Review the literature of conservatism in financial reporting indicates the importance of conservatism in accounting profession. Researchers have always tried to determine the degree and ways of conservatism in financial reporting and accounting, although this is not done easily, because there is not a direct measure of conservatism. However, conservatism has been one of the key principles in accounting for years, and regardless of the difficulties in its measuring; it can have a major impact on the information content of financial statements. So the main purpose ofthis paperis to testthe changes of accruals and MTB ratio over time in order to know the changes in financial reportinginIran, because theevidencein theaccounting literature in some countries shows conservatism infinancial reporting increases over time. In fact, thevalidity ofsuch claim make all time-series analysis offinancial statements meaningless and misleading (which isconsidered an important source ofinformationin financial markets). Sostudying about Iran accounting system is important and substantial for all groups ofstakeholders. Due to the lackof agenerally accepteddefinition ofconservatism, some ofconservatism proxies in financial reporting aredefined and examined inthispaper. Thismeasuresfocus on the accumulation ofnon-operating accruals and MTB ratio. Statistical populationof this research is thecompanieslisted inTehran Stock Exchange (TSE) since 2003 to 2011. After adjusting for outliers, sample consists of 116companies. Although definitive conclusions is impossible, the existent evidence of financial reporting in TSE firms does not support the hypothesis of this paper and shows that the degree of conservatism in accounting has not increased over past decade.